Cape Town - A year ago, Pravin Gordhan was parachuted in to save the Treasury and South Africa following the surprise axing on 9 December of Nhlanhla Nene as Finance Minister. His replacement, little-known lawmaker David (Des) van Rooyen only lasted four days.
This shook the markets, but regardless of market moving international events and what local politicians continue to throw at us, the rand remains resilient against the dollar, says Eike Feltz, CEO of independent foreign exchange specialist firm Currency Partners.
With the use of infographics to illustrate the point, Feltz writes: "In a post-Brexit and Trump Presidency world, coupled with a precarious political environment at home, South Africans can be forgiven for feeling jittery when it comes to their capital.
"Those seeking financial and investment 'safe-havens' may consider externalising their capital by selling rands and going offshore – if only to act as a hedge – while others sit tight, hoping to ride out the rand’s rocky road into the New Year.
"While the general market consensus seems to be that going offshore is sensible, the more difficult decision – against the continued currency market volatility – is deciding when to do so."
Don’t act emotionally. Step back from the local and international drama and take a long-term view of the currency market instead of chasing short-term gains. As we head towards the annual allowance deadline on 31 December, here’s our round up of what rocked the rand in 2016. A key highlight is the rand’s resilience against the dollar in the face of sustained local and international adversity, something we feel the local currency is not given enough credit for and which should be factored into one’s currency transfer decisions.
One year on: Friday, 9 December marked a year since “Nenegate” happened. Arguably the event that kicked off the most tumultuous year of political turmoil that we’ve seen in a very long time, it ignited the rand’s spectacular plunge from R14.40 in December to R16.80 against the USD by January 2016. Yet despite this, 12 months later the rand has bounced back to levels stronger than before that unforgettable day in December 2015 - overcoming a pair of international Black Swans and a myriad of local political factions.
Rallying cry. In January the World Bank reduced the country’s economic growth forecast, stirring fears about a downgrade for SA to junk bond status. Fortunately these fears have recently been allayed - for the time being.
By April the Constitutional Court issued a decision on Nkandla, directly reassuring the international community that accountability is still a possibility, causing the rand to rally to a more respectable R14.70 against the dollar. But by May, this recovery was stymied as the stagnating local economy – mainly characterised by increasing unemployment and diminishing manufacturing output – put the brakes on. In June, the currency rallied again, aided by the fact that South Africa wasn’t downgraded after all; and in August, a revitalised local election saw it settle at an optimistic R13.60.
Global stage. Neither South Africa, nor the rand’s travails, have been in isolation. Many different countries have faced economic turbulence in 2016: the US’s bizarre presidential election, Europe’s migration crisis and the UK’s shock Brexit vote, have all made for an economically challenging and unpredictable year. As such, for much of the year, this global tumult may well have had a “shielding” effect on South Africa and the rand. While Brexit initially prompted a knee-jerk response to sell off the rand (as investors flocked to a more stable dollar), South Africa’s woes haven’t been as bad in light of these events.
Turning point. Back home, the NPA’s welcome dismissal of charges against Pravin Gordhan saw the markets react positively, sending the rand to R13.31 against the dollar. Just a day later it was given another big boost when the State Capture Report bombshell broke on the back of Zuma’s surprise withdrawal of his interdict against its release, eventually settling at R13.50.
Republicans Trumped. This year will surely be remembered as the year of “The Donald”, a political anomaly who is more reality TV than White House clout. While the rand stabilised in October when a Clinton administration seemed more likely, Trump's surprise 11th hour win caused an immediate “risk-off” reaction, sending markets plunging, while the ZAR lost approximately 5% in a single day. This caught everyone by surprise, as markets clawed back losses.
The rand then gained another 10c against the USD as Trump started his acceptance speech, a case of the reality being less “scary” than the “possibility”. But 24 hours later a vicious emerging market sell-off began. While the final outcome is unknown, this was almost as brutal as the reaction to former finance minister Nene’s sacking, with the rand losing 8.6% against the dollar (from R13.32 to R14.47) compared to the initial 10% from December 2015.
No crystal ball. Notwithstanding the US elections, the Fed has as much influence over our precarious rand as President Trump will. Having hinted at increasing interest rates for some time now, if the Fed does raise interest rates in the near future, we would likely see further rand weakness as a favourable South African yield-play unwinds. We should prepare for the likely outflow of "fast money" as risk-reward ratios shift away from emerging markets in favour of other investment opportunities with the majors.
Rating our fate. While we have come through the ratings agencies’ announcements relatively unscathed - bar the revision by Fitch from stable to negative - we mustn’t be complacent and be fooled into thinking we’re through the thick of it. South Africa will remain firmly on the radar of Moody’s, Fitch and S&P until June next year when they’ll again update us on our performance. So while the ZAR safely hovers around R14 to the USD today, it is still at risk should any political surprises happen at home between now and next June.
Arguably 2016 has had its fair share of shocks. For investors who intend externalising rands and moving capital offshore, it’s not rational to hope for the rand to improve by 10-20c before buying dollar, while at the same time exposing themselves to the risk of greater rand losses, should it blow out again for whatever reason, says Feltz.
"We saw this happen in December last year and again, not even a year later, post the US election. Rather than be motivated by short-term foreign exchange gains in what is a highly volatile and unpredictable currency market that can likely put you on the wrong side the next time this happens (judging by what we’ve seen this year), take a long-term view on the rand and stick with your investment plan."Read Fin24's top stories trending on Twitter: Fin24’s top stories